The Federal Budget in Canada

The federal government is responsible for managing hundreds of billions of dollars in public funds every year. To effectively manage its money, the federal government, like all Canadians, needs a budget – a financial plan for the future. This article introduces the process and significance of the federal budget. In particular, it examines the nature of the federal budget, the process by which it is made and approved, and its importance to Canada’s political and democratic system.

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What is the Federal Budget in Canada?

A brief introduction to government finances and Canada’s two federal budgets.

Finances & Budgets

The federal government is a very complex financial entity. Each year the federal government brings in hundreds of billions of dollars in the form of tax revenues, premiums, tariffs and duties, which it then spends on thousands of different programs and policies. This includes everything from keeping the Parliament buildings clean, to subsidizing the Canadian health care system, to buying new equipment for the military.

To manage all this money, the federal government, like most Canadians, needs to have a budget. A budget is simply a financial plan for the future. Just as an individual uses a budget to determine savings and spending and more effectively plan for the future, so, too, does the Government of Canada.

Two Federal Budgets

The federal government actually has two budgets that it makes every year:

• The Revenue Budget: This budget concerns only government income, or how much money the government expects to collect over the course of the year (money coming into the federal government’s coffers). This includes money collected through federal income tax, the Goods and Services Tax (GST), taxes on gasoline and cigarettes, and federal tariffs and duties.
• The Expenditure Budget: This budget concerns only government expenses, or how much money the government expects to spend over the course of the year (money going out of the government’s coffers). This includes spending on social programs, government administration, police and defence, and maintaining the government’s debt.

With both the Revenue and Expenditure Budgets, the federal government has a reasonably clear picture of its future finances. The government knows (approximately) how much money it will be collecting and where it will be collecting it. It knows which government departments and agencies will be getting the money and how they will be spending that money. The government can also predict whether it will have a deficit (that is, whether it will spend more money than it collects) or a surplus (whether it will spend less money than it collects).

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The Budget & Canada’s Democratic Government

Overview of the role of the budget in the Canadian democratic system.

While the budget helps the federal government manage its finances and plan for the future, it also plays an important role in the Canadian democratic system. The federal government (symbolized by the Prime Minister and Cabinet) cannot simply collect and spend public money however it chooses. Rather, it must first get the permission of citizens’ elected representatives in the Canadian Parliament.

The federal government must follow two steps to get this democratic permission. First, it must present its budgets for the next year to Parliament for review. This is usually done annually in early spring (February or March). Second, after Parliament has reviewed the budgets, it must vote on whether to support or reject them.

The following provides an overview of these two steps, as well other information on the budget and Canadian democratic tradition.

Step One: Presenting the Budgets

Every year, the federal government presents its budgets to Parliament in two ways: (i) with a Budget Speech given by the Minister of Finance, and (ii) with a Tabling of the Estimates by the President of the Treasury Board.

When the media refer to the “federal budget” they are usually referring to the Budget Speech. The Budget Speech is a financial statement made each year (usually in February) by the federal Finance Minister to Parliament (see Contemporary Budget Process for more information on the Finance Minister). In that statement, the Finance Minister provides Parliament with a general overview of the government’s financial picture, and its plans for the upcoming year.

There are usually three parts to the Finance Minister’s budget address:

• Details of the Revenue Budget: This includes economic projections for the Canadian economy, the total amount of monies the government expects to collect, and any changes to federal tax rates or structures.
• A General Overview of Spending: Specifically, the total amount of monies the government expects to spend, as well as its spending priorities (health, education, defence, debt) over the next year (or few years) are identified.
• Overall Financial State: The government outlines its overall financial position for the next year (or few years). Of key importance is whether the government expects to record a deficit (spending more than it takes in) or a surplus (spending less than it takes in).

In addition to the details provided in the budget and Budget Speech documents, the President of the Treasury Board also provides Parliament with specifics concerning the government’s spending plans through what is known as a Tabling of the Estimates (see Contemporary Budget Process for more information on the Treasury Board).

The Estimates consist of three parts:

• A General Overview of Spending: This section generally reflects statements made by the Finance Minister in the Budget Speech.
• The Main Estimates: This entails a detailed listing of the money required by individual federal departments and agencies for the upcoming year in order to deliver the programs for which they are responsible. The Main Estimates also provides information on the Appropriation Bills the government will be asking Parliament to approve. (Appropriation Bills are pieces of legislation that request specific amounts of money for particular government activities.)
• Department Expenditure Plans: While the Main Estimates provide information on the amount of money each federal government department and agency will need for the upcoming year, the Department Expenditure Plans provide specific details about how that money will actually be spent. The Department Expenditure Plans are divided into two components:
  • Reports on Plans and Priorities: These include information on the specific programs and services a federal government department or agency will offer, and how much each intends to spend on specifics, such as labour and materials, in order to provide those programs and services.
  • Department Performance Reports: These reports entail assessments of each federal government department or agency, and whether it meets the expectations as set out in the Reports on Plans and Priorities.

The President of the Treasury Board presents the General Overview of Spending and the Main Estimates to Parliament in late-February or early-March (soon after the Finance Minister presents his Budget Speech to Parliament and the nation). The Department Expenditure Plans are presented to Parliament at a later date in the year (usually in the fall).

Step Two: Parliamentary Vote on the Budgets

Following the Budget Speech, and the tabling of the Main Estimates, Parliament reviews the federal government’s budgets and votes on whether or not to support them.

This is a very important vote for the government. Not only is the parliamentary budget vote necessary for the government to begin collecting and spending public monies for the upcoming year, but it is also a measure of the confidence the government enjoys, and so it is aptly named a vote of confidence or a confidence measure. (A confidence measure is a vote on whether the government should continue to remain in power.) To win a vote of confidence, the government must get the support of a majority of Members of Parliament. If the government fails to get a majority of support (often called a ‘vote of non-confidence’), then the government may fall and the Prime Minister asks the Governor General to dissolve Parliament and call a general election. The budget vote is thus also a vote on the government itself. If the government loses the budget vote, not only does it lose its spending powers, it also loses its right to govern.

In the case of majority governments, there is generally little chance that the government will fall. A majority government is one in which the governing political party has a majority of seats in the House of Commons. The government is usually assured of winning a budget vote by virtue of the fact that its own party has a majority of votes in the House. The practice of party discipline — when the Prime Minister and Cabinet Members can threaten their own party members with expulsion or demotion if they vote against the government’s budget — is always a factor during important votes such as passing the federal budget.

In the case of minority governments, however, the situation can be much trickier. A minority government is one in which the governing political party does not hold the majority of seats in the House of Commons. Accordingly, the government, cannot pass the budget on the strength of its own party’s votes, but must enlist the support of other political parties. The government will negotiate with other political parties during the development of the budget, and may grant major concessions to an opposition party in return for its support in the ever-crucial budget vote.

Budget Secrecy

Traditionally the federal budget was a very secretive process, and governments tended not to disclose any information on the budget until the Finance Minister’s Budget Speech in the House. In a famous and extreme example of this secrecy, Prime Minister Louis St. Laurent required that his Finance Minister type the entire budget himself, so that not even the Minister’s secretary would know its details before they were public.

Governments pursued budget secrecy for many reasons. There was the worry that individuals would use inside information (information not known by the general public) from the budget to profit from upcoming government decisions. Governments also used budget secrecy to undermine the ability of opposition parties to criticize the government in an effective manner.

In recent years, and especially under Liberal Prime Ministers Jean Chrétien and Paul Martin, there has been less secrecy surrounding the federal budget process. Major budget initiatives are now revealed publicly in advance of their official presentation in the Finance Minister’s Budget Speech. This stems from a desire to get feedback from the populace and financial markets, and to forewarn the Canadian population as a whole about any major changes in the government’s financial policies, or shifts in savings or spending. A certain degree of secrecy, however, is still maintained; the government never divulges the full details of the budget until the document is formally presented to Parliament through the Finance Minister’s Budget Speech. At that time, despite selective leaks that may have taken place in advance of Budget Day, the government (as of late) often holds back one or two budget ‘surprises’ to maintain some degree of interest in the Minister’s Speech and in the budget “event,” so to speak.

Alternative Budgets

Historically, the Official Opposition in the House of Commons usually prepares an alternative budget, which it presents to the general public along with the federal government’s budget. This practice traditionally served as a means of “taking issue” with the financial and spending decisions made by the government, and laying out an alternate agenda. In recent years, however, the opposition parties have been more likely to focus on certain aspects of the government’s budget, rather than presenting a complete alternative budget.

Some public policy institutes and advocacy groups also present alternative budgets as a means of expressing their dissatisfaction with government financial decisions and spending priorities.

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Making a Budget: A Historical Perspective

An examination of historical changes to the budget-making process.

While Parliament reviews and votes on the sitting government’s budget, it is the responsibility of the federal government to actually make or develop the budget. How does it actually go about doing this? Who is involved in setting budget priorities and making budget decisions?

The following provides a historical perspective on how federal governments make budgets. In sum, the process of making a federal budget has undergone radical change over the years. Whereas budget decision-making used to involve a very informal and decentralized process, it has evolved over the years into a highly formalized and centralized procedure.

Traditional Budget Processes

For most of the federal government’s history, the making of a budget was a very informal and decentralized process. The Prime Minister and his/her Cabinet, through informal consultation, would set general government objectives and priorities. Individual ministers and department heads, however, had a great deal of independence with respect to specific policy and budgetary decisions within their own areas of responsibility.

The result was a very decentralized (bottom-up) approach to government budgeting. Ministers would provide Cabinet with budgets for their particular departments. The Prime Minister and the Minister of Finance would then compile these departmental budgets into an overall budget for the government.

Early Reform: The Planning-Programming-Budgeting System

In 1969, the federal government began to make significant changes to the federal budget-making process. These changes were the product of many factors.

First, there was recognition that the traditional approach to making a budget was highly inefficient. The traditional approach, which involved informal consultation amongst ministers and bottom-up budgeting, often resulted in the development of government policies and programs that had little regard for or consideration of the overall financial implications for the country. Second, during the late 1960s and early 1970s, many western governments began to adopt a ‘scientific’ or ‘rational’ approach to governance. This approach involved a high reliance on mathematics, statistics, the social sciences, and formalized decision-making procedures.

In the early 1970s, Prime Minister Pierre Elliot Trudeau’s Liberal government introduced the Planning-Programming-Budgeting System (or PPBS). This system was intended to integrate the federal government’s policy planning and budgetary processes. Moreover, PPBS involved a shift in the focus of budget decisions. Traditionally, the federal government had been preoccupied with the costs of a specific program or policy, and whether or not the government had enough money to pay for it. Under this new system, however, the focus shifted to determining the ultimate effect government activities would have on the lives of Canadians. If a particular program or policy was deemed to have a highly positive effect, it was made a budget priority regardless of the cost. This explains, to some extent, why Canada’s social-welfare system grew so significantly during the 1970s.

The Planning-Programming-Budgeting System also involved a very centralized (or top-down) approach to budget making. Government departments were organized into broad policy groups (health, education, justice, national security, and the economy). Cabinet and the Privy Council Office would set policy and budgetary priorities for each group (see Making a Budget: Contemporary System for more information on the Cabinet and central agencies). Government departments in each group would then conduct internal analyses and submit budget requests, showing how their activities contributed to the priorities set out by Cabinet and the central agencies.

In operation, the new budget-making system never met expectations. This was largely due to the shortcomings of statistical analysis and the social sciences at the time, and the resulting inability to precisely gauge the effect of government activities on the lives of Canadians. For example, it was very difficult to determine how government spending for drug testing or health-related education actually affected the health and lives of individual Canadians. There was neither a practical, nor a precise way, to measure the ‘health’ of all Canadians, nor to determine to what extent a government drug-testing program advanced or deteriorated the quality of an individual’s health. Furthermore, the Planning-Programming-Budgeting System involved negotiating the government’s entire budget every year, meaning that, each year new priorities would have to be set for each policy group, and every department would have to perform an internal analysis and then justify its activities according to those priorities. Such an approach turned out to be a very impractical way to manage the government finances.

The budget-making approach employed by the Trudeau government, however, did have some lasting effects on the federal government’s budget-making process. Individual departments and agencies continue to be organized into broad policy categories. Analysis of the impacts of programs and activities is now commonplace. Most importantly, federal governments have carried on with the centralized (top-down) approach to budget making.

Later Reform: The Program and Expenditure Management System

In the late 1970s, the shortlived Progressive Conservative minority government led by Joe Clark again reformed the budget process, this time introducing the Program and Expenditure Management System (PEMS).

Under PEMS, individual government departments and agencies were again classified into broad policy groups. However, instead of providing policy priorities to each group, Cabinet and the central budget planners would only assign an expenditure (or spending) limit. It was then left to committees of Cabinet Ministers with responsibilities in each policy group to decide priorities among themselves, in addition to deciding how to divide the spending allocation. The intent was to force ministers in a common policy group to set priorities jointly, and to determine how best to finance those priorities.

Summary

Over the years, the federal government’s budget-making process has changed significantly. What had once been an informal and decentralized process has now become a very formal and centralized one. Successive reforms in the 1970s brought formalized decision-making structures to budget making. Moreover, the Cabinet, Prime Minister, and other key players have come to exert a much more dominant role in setting the federal government’s priorities and, accordingly, determining its budget.

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Making a Budget: Contemporary Process

An examination of the current budget-making process.

 In 1993, the Liberal government, led by Jean Chrétien, introduced the Expenditure Management System (EMS) as part of the budget-making process. The federal government continues to use this system today. At the time of its introduction, the federal government was committed to reducing the deficit. The design of EMS reflects the depth of commitment to this objective, as it gives the Prime Minister greater control regarding overall government spending.

There are three important characteristics of EMS:

• Dominance by three key architects in the budget-making process;
• A secondary role for Cabinet and individual government departments; and
• Consultation with Parliament and the general public.

Dominance by Key Architects

Under EMS, three central government bodies are responsible for the overall control of the budget process: the Privy Council Office, the Department of Finance, and the Treasury Board. The following provides an overview of these entities, and the role each one plays in developing a federal budget:

The Privy Council Office: The Privy Council Office directly supports the Prime Minister across the full range of his/her responsibilities as head of government. With regard to the budget process, the Privy Council Office’s primary role is to ensure that individual ministers and government departments take into account the overall budgetary priorities of the Prime Minister when making policy and financial decisions in their areas of responsibility.

• See the Privy Council Office website

The Department of Finance: The Department of Finance is responsible for policy decisions such as federal tax rates and structures. With respect to the budget process, the Minister of Finance is responsible for establishing a fiscal framework within which all government departments and agencies must operate. The Minister often works in close cooperation with the Prime Minister to establish this fiscal framework.

• See the Department of Finance website

The Treasury Board: The Treasury Board is a committee of Cabinet consisting of six ministers who are responsible for the management of government expenditures and human resources in the public service. While the Minister of Finance establishes budgetary targets for government departments and agencies, the Treasury Board ensures the targets are met. The Board reviews the Business Plans for each department and agency, and assesses whether they are using their resources effectively.

• See the Treasury Board website

Secondary Role of Cabinet and Departments

Under the Expenditure Management System, the Cabinet and key players in individual departments and agencies are generally relegated to secondary roles in the budget-making process:

• Cabinet (as a whole): The Cabinet is the federal government’s executive decision-making body. It consists of all Ministers of the Crown, and is led by the Prime Minister. With regard to the budget-making process, the Cabinet reviews the budget strategies, policy priorities, and fiscal targets provided to it by the Minister of Finance and the Treasury Board. Traditionally, the Cabinet has had a large say in the budget-making process. In recent years, however, it has been relegated to simply making recommendations or reviewing budgetary decisions already made by the Minister of Finance, the Prime Minister (through the Privy Council), and the Treasury Board.
• Cabinet (Policy Committees): Cabinet ministers are divided into separate policy committees based on specific policy areas (for example, economic policy and social policy). Under the Expenditure Management System these committees develop policy priorities, priorities that are in turn forwarded to the budget-making architects. Members of Cabinet policy committees also oversee the design and implementation of new programs announced in the budget.

Departments and Agencies: This grouping includes individual ministers and deputy heads of departments and agencies. The primary role of these individuals in the budget process is to develop and implement departmental business plans that reflect the priorities set out by the budget’s architects.

Consultation with Parliament

Part of the Expenditure Management System has involved attempts to open the budget-making process up to groups outside of the government, in particular, to Members of Parliament, as well as the appointed members of the Senate.

• See Parliament of Canada website

Parliament participates in the budget-making process through Parliamentary Standing Committees. Throughout its history, the Canadian government has established specialized parliamentary panels to study matters of national importance.

For more information on Committees:

• “Introduction to House of Commons Committees”
• “Committees: Practical Guide (2004)”

A ‘Standing Committee’ is a permanent parliamentary committee that reviews and makes recommendations in a specific area of government business. Standing Committees generally comprise MPs from all political parties represented in the House of Commons. Some examples of committees include the Standing Committee on Aboriginal Affairs and Northern Development, the Standing Committee on Canadian Heritage, and the Standing Committee on Foreign Affairs and International Trade.

For more information on Standing Committees:

• Standing Committees: Parliament of Canada website

It is important to note that these Standing Committees only have the power to review and make recommendations. The federal government (namely, the Prime Minister and the Cabinet) is not legally required to take or implement committee recommendations.

With regard to the budget, Standing Committees review the spending of individual departments within their given area of responsibility. For example, the Standing Committee on Aboriginal Affairs and Northern Development will review the spending of all departments related to Aboriginal affairs and the North. Again, while these Committees’ reviews are non-binding on the government, they do provide an opportunity for Members of Parliament to provide their views on government finances, spending, and to some extent, direction.

In terms of the budget-making process, the Standing Committee on Finance is one of the most important. This Committee is responsible for reviewing overall government finances and budget decisions. Every year, the Committee holds pre-budget consultations that take the Finance Minister and a team of Parliamentarians across the country to solicit the budget views of experts, interest groups, and the general public, who provide suggested recommendations to the government. The Committee also examines the budget in great detail after it has been presented by the government to Parliament, and the Canadian people.

For more information on Standing Committees:

• Standing Committee on Finance website

Consultation with the General Public

Members of the general public are also given other opportunities to provide input into the federal budget:

• Groups and individuals can comment on proposed government spending plans during the meetings of Parliamentary standing committees. They can either do this when the Standing Committee on Finance holds pre-budget consultations, or when the various standing committees review individual departmental spending.
• Groups and individuals can comment on budgetary decisions by interacting with individual government departments and agencies (for example, by offering comments on the quality of services a given department provides).
• Finally, governments often release major parts of the budget to the general public prior to its official presentation in Parliament. This approach is often taken to get a pre-budget sense of the public reaction to proposals in the budget, and whether or not what the government is proposing will be politically successful or not. This idea, of publicly ‘testing’ government proposals with the public, is referred to as a trial balloon.

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The Budget Cycle

Stages of budget planning and implementation over the course of a year.

The making of the federal budget does not occur only when the government officially unveils the budget and tables the Government Estimates. Instead, over the course of the year, the federal government is constantly working through various stages of budget development and implementation.

The following figure provides an overview of the various stages of the budget development and implementation process during the course of a given year.

* Note: See Making the Budget: Contemporary Process for more information on the various groups and processes discussed in this section.

Diagram of the Budget Cycle

(Source: Treasury Board of Canada Secretariat)

Spring (March to June)

• Cabinet (as a whole) conducts a strategy session in late spring to assess the results of the latest federal budget it has released, and to identify high priorities for recommendation for the next federal budget.
• Cabinet (Policy Committees) oversees the design and implementation of new policy and program initiatives announced in the previous budget.
• Departments and Agencies prepare multi-year business plans based on the funding they were allocated in the previous budget. These business plans are then reviewed by the Treasury Board to ensure they are consistent with the budget targets.
• Parliamentary Committees begin to review the program and financial plans of individual government departments and agencies.

Summer (June to September)

• Central agencies (the Privy Council Office, Department of Finance and Treasury Board) consult with key personnel in individual government departments and agencies, Cabinet Policy Committees, and Parliamentary Committees, in order to develop budget strategies and options for the Minister of Finance to consider in the next federal budget.
• The Department of Finance prepares an update of the fiscal and economic outlook, which is generally made public later in the fall in a mini-budget type presentation by the Minister of Finance.

Fall (September to December)  

• Cabinet considers and approves the strategies that the Minister of Finance has put forward for the next federal budget.
• The Department of Finance, along with the other principal budget architects, prepares the Budget Consultation Papers for the next federal budget. These papers are the result of the consultation between the architects, Cabinet, and Parliamentary Committees, and include economic and fiscal outlooks for the next year, as well as prospective financial targets.
• The Minister of Finance releases these Budget Consultation Papers and begins consultation with the Standing Committee on Finance, provincial finance ministers, the general public, and other stakeholders.
• The Standing Committee on Finance submits its report on the government’s proposed strategy for the next federal budget to the Finance Minister.
• The Minister of Finance develops a budget strategy, drawing on the results of the consultation process, the recommendations of the Standing Committee on Finance, and the recommendations of the Cabinet Policy Committees.

Winter (January to March)

• Cabinet (as a whole) reviews the budget strategy, including fiscal targets, new spending initiatives, and reductions. The Prime Minister and the Minister of Finance make the final decisions.
• The Department of Finance finalizes the budget documents relating to government revenues and spending priorities, while the Treasury Board Secretariat finalizes the budget documents relating to expenditures by individual departments and agencies.
• The Minister of Finance delivers the Budget Speech and the President of the Treasury Board tables the Expenditure Budget (more commonly known as the Estimates).

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Importance of the Budget

How important is the budget process to Canada’s system of government?

The budget process has become a very complex procedure involving many different participants, both within and outside the federal government. Under Canada’s democratic system, the federal government is obliged to present its budgetary approach to Parliament for review. Successive federal governments have come to evolve the formal budget-making procedure over the years, in terms of how a budget is created, what items become budget priorities, and who is involved in the decision-making process.

In all this, the question remains: How important is the budget process to Canada’s system of government?

The answer is that it depends on the national priorities the government of the day has set for itself, as well as the political position in which it finds itself.

The Budget & National Priorities

When a government is determined to control or reduce spending, such as the Liberal governments did in the 1990s, the budget becomes a critical part of this process, and its impact on decision-making is paramount. The budget process becomes highly centralized, in the hands of the Prime Minister and the key budget architects; much time and effort are spent ensuring that new programs and policies meet overall financial objectives. In this regard, the Budget Speech is of even greater importance to the government politically. If the public has an expectation that spending will be controlled and the books will be balanced, then the Budget Speech is an opportunity for the government to show that it is indeed meeting these expectations.

The Budget and the Government’s Political Position

The importance of the budget also depends on whether or not the government finds it is in a majority or minority position. If the Prime Minister presides over a majority government, then the government is always assured of passing a budget and of not falling to a vote of non-confidence (see The Budget & Democracy for more information). As such, the government really does not have to expend much effort to please the Opposition parties in any way, nor seek their input in the budget-making process in order to guarantee support so that the government does not collapse.

If, however, there is a minority government situation, then the whole budget process becomes very important. The minority government must seek the support of other political parties to ensure the budget will be passed and that there will not be a vote of non-confidence. This involves intense negotiations between political parties, and greater participation by Parliamentary Standing Committees. The Government may even be open to greater input by the general public, as a means of ensuring its budget will enjoy the widest possible political support.

Summary

The importance of the budget depends, in large part, on national priorities and the overall position of the government. During the 1990s, Liberal governments and a large portion of the Canadian public were committed to controlling spending, eliminating the deficit, and reducing Canada’s debt. As a result, all aspects of the budget process became very important, both politically and financially. At the time of this writing, the budget continues to play a key role in government direction, given that Prime Minister Stephen Harper’s Conservatives have a minority government.

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Links for More Information

List of links for more on this topic

Federal Government

• Prime Minister of Canada
• Federal Privy Council Office
• Federal Department of Finance
• Treasury Board of Canada

Federal Parliament

• Parliament of Canada
• Parliament of Canada Standing Committees
• Parliament of Canada’s “Introduction to House of Commons Committees”
• Parliament of Canada’s “Committees: Practical Guide (2004)”

Research and Advocacy Groups

• Green Budget Coalition
• Canadian Centre for Policy Alternatives
• Canadian Taxpayers Federation
• Canadian Tax Foundation
• Fraser Institute